Wholesalers Are Ready for a Fight

Alcohol wholesalers, the men and women who work with wineries and retailers to put wine on store shelves, believe their industry is under threat and are on the offensive. They won a big victory in Washington state on Tuesday, as voters rejected a ballot initiative that would have allowed retailers to buy beer and wine directly from breweries and wineries and eliminated many of the state’s less business-friendly regulations governing alcohol sales. Washington-based retailer Costco was the biggest backer of the proposal; wholesalers and their lobbying groups were major financial backers of the campaign to defeat the idea.

Wholesalers’ next target is the nation’s capitol. They’ve pushed Congress to pass House Resolution 5034, the Comprehensive Alcohol Regulatory Effectiveness (CARE) Act of 2010, since its introduction in April. Opponents of HR 5034, including many wineries, retailers and wine lovers, claim the bill is an attempt by the wholesalers to protect their turf. “The wholesalers would like to have protected territories and as little competition as possible,” said Keith Wollenberg, a buyer at K&L Wines in California. “This bill can only serve to raise prices and reduce choices of what wines you get to drink.”

In a series of interviews with Wine Spectator, several wholesalers claim their target isn’t direct shipping of wine; the number of consumers ordering via the Internet from out-of-state wineries poses little threat to their business, they assert. But they view recent lawsuits in support of direct shipping as a wedge to dismantle the three-tier system and deregulate alcohol sales across the nation. They point to Costco’s support for the ballot initiative in Washington as exhibit A.

“What’s the real issue here?” asked Craig Wolf, president of Wine and Spirits Wholesalers of America. “Are [wineries] putting millions of dollars up [in opposition to 5034] because they’re concerned about [limits on shipping such as] volume caps or face-to-face sales? I think it has more to do with challenging state laws and wanting to take down the system.” Such sentiments are the reason that even though H.R. 5034 is unlikely to be passed this year, both sides agree that it will be a serious issue in 2011. The fight has just begun; it could last years and completely change how consumers buy wine in the United States.

H.R. 5034 would make it much harder for wineries or consumers to challenge laws that limit direct shipping, such as volume cap laws, which allow a state to permit wineries of only certain sizes to ship to residents, or laws that require consumers to visit an out-of-state winery before ordering wine. It would also make it hard to challenge laws that prevent consumers from buying alcohol from out-of-state retailers.

The conflict goes back to the 21st Amendment to the U.S. Constitution, which repealed Prohibition and put states in charge of regulating alcohol. Most created a three-tier system: Producers sell to wholesalers, who in turn sell to retailers. (In a few states, the government owns the wholesale and even the retail tier.)

Direct-shipping supporters point out that times have changed since 1933. There are more than 6,000 wineries in the United States. New craft breweries and microdistilleries spring up every day. But the middle tier has consolidated. The top 10 wholesalers controlled 56 percent of the market in 2009. Consumers complain that local wholesalers don’t carry wines they want. Producers complain about regulations such as franchise laws, which make it nearly impossible for a producer to end a contract with a wholesaler. H.R. 5034 would also make it harder to challenge those rules in court.

Wholesalers counter that state regulation is under attack, and say that H.R. 5034 would protect their businesses, which play a key role in helping small brands—wineries, craft brewers and distillers—establish themselves in a crowded marketplace. They believe franchise laws prevent small brands from switching wholesalers without compensation once the brands have become successful.

“The constant whining and complaining from the wineries that this is somehow going to change direct shipping in this country is absurd.”—Craig Wolf

“The vote in Washington state should send a clear message to lawmakers in the nation’s capitol who are considering federal legislation—H.R. 5034—that seeks to support state control over alcohol: When given the choice, people do not want to see alcohol deregulated,” Wolf said in a statement Wednesday. “The vote of the people of Washington state is a strong reminder that the majority of Americans are opposed to the deregulation of an alcohol distribution system which has proven to be the safest and most effective in the world.”

Craig Purser, president of the National Beer Wholesalers Association, points to the great diversity in the market as evidence of wholesalers’ importance to both the small manufacturers and consumers. “In 1993 there were fewer than 50 breweries in the United States, and now there are more than 1,500,” he said. “We think that’s something that ought to be celebrated. Part and parcel to that success has been a system where alcohol is regulated at the state level.”

Richard Doyle, chairman and CEO of Harpoon Brewery, who testified before Congress in opposition to H.R. 5034, agreed with Purser that wholesalers are instrumental to the development of small breweries. “Small brewers need wholesalers to get to market. We don’t have the critical mass of scale to get to market on our own. It definitely benefits us and the wholesalers to have each other,” Doyle said.

But he thinks the bill goes too far in protecting their interests. “Look at the mid- to late-1990s, when many wholesalers chose to dump craft beers at the behest of large brewers [who saw their shelf space at retailers being crowded by the smaller independent labels]. We absolutely want independent wholesalers, but when they don’t act independently, that’s a problem, because then you have a non-independent wholesaler who you’re locked into a franchise agreement with, and it’s hard to move.”

Wolf said H.R. 5034 would not end direct shipping. “The constant whining and complaining from the wineries that this is somehow going to change direct shipping in this country is absurd.” But opponents don’t accept that, because the law would allow states to pass laws that effectively ban direct shipping. Wolf admitted as much. “[Those laws] are a policy matter for the state—not for a judge to decide. Our position is, if the state takes the time to draft an even-handed statute that’s not [facially] discriminatory, it should be upheld.”

That’s not good enough for direct-shipping supporters and those who believe the three-tier system is outdated. “As retailers, our goal is for consumers to be able to purchase wine from any licensed source in the country, regardless of which state they live in,” said Trey Beffa, vice president of K&L Wines. “[5034] puts the power into [wholesalers’] hands.”

It’s unlikely the bill will receive any further attention in the upcoming post-election lame-duck session of Congress, but both sides agree that it will be a serious topic of discussion come 2011. Asked if the wholesalers would push to have a reiteration of the CARE Act submitted next year, Wolf